Investors are entering one of "the most dangerous phases" of the economic and market cycle, Henderson's co-head of multi-asset has warned.
Reflecting on the "eerie stillness" of low volatility and trading volumes, Bill McQuaker (pictured) said confidence in central banks’ ability to manage the impact of monetary tightening may be misplaced.
Instead, he suggested, policy changes may come faster than investors anticipate.
In his portfolios, he has created an insurance policy against a pick-up in volatility. This includes reserving cash as "firepower" for an unexpected event, and also seeking exposure to "unloved" parts of the market, such as large-cap oil and pharmaceuticals.
Faith in central banks is extremely high
He said: "Faith in central banks is extremely high. If it were to emerge that this confidence was misplaced – if, perchance, the Fed misjudges the strength of US growth or the risk of inflation, this could trigger a severe bout of indigestion for asset markets."
Geopolitical risks may also provide flash points, he argued, with potential for trouble in the South China Sea and North Korea as well as Ukraine.
Thirty-week annualised historic volatility is nearing pre-crisis levels in both developed and emerging market equity indices, McQuaker noted, while the CBOE Volatility index is trading below 11 for the first time since 2007. Volatility in high yield bonds, currency and US interest rates is also at a seven-year low.
